ECB flags AI valuations, bond stress and fund losses as main risks

FRANKFURT, Nov 2 (Reuters) - The European Central Bank has identified high valuations for AI stocks, stress in the bond market and potential losses at shadow banks as the main risks to financial stability at present, ECB Vice-President Boris Vujcic said on Monday.

The ECB is due to publish its biannual Financial Stability Review on November 18 against a backdrop of volatile markets as expected returns on AI investments come under scrutiny and indebted borrowers such as France face pressure.

The ECB has been warning about a bubble in US tech stocks for at least two years but this time cracks are beginning to appear, with the Nasdaq down nearly 8% from its all-time high after results from the likes of Alphabet, Intel and Amazon.

"As the FSR has been prepared, we saw the correction in the markets in AI (stocks)," Vujcic told an event in Ireland. "Obviously, everybody's exposed to that...including Europe," he added, noting that many investment funds have positions linked to AI.

As a second risk, Vujcic noted the recent, sharp rise in government bond yields, especially for indebted countries.

He said the ECB would be "monitoring" the bond market but, echoing the central bank's official line and playing down speculation about any intervention, he added that the primary response should come from governments.

"The answer to that, obviously...if the problem is fiscal, has to be primarily the fiscal reaction," he said.

He mentioned losses at investment funds and other shadow banks — non-bank financial institutions in central bank speak — as the third main risk.

(Reporting by Francesco Canepa; Editing by Aidan Lewis and Hugh Lawson)